Yellow metal to the rescue

Build a 10-15 per cent allocation to gold in your portfolio to guard it against economic and geopolitical risks

Gold has rallied 3.48 per cent over the past one month and is now trading above the ~30,000-mark in the Indian market. In the international market too, it has breached the $1,300 per ounce mark — a level it had been unable to cross for about 10 months. Given the low likelihood of the US Federal Reserve raising interest rates in the near future, the escalating tensions vis-a-vis North Korea, and the stretched valuations of equities, investors need to have an allocation to this safehaven asset.

The primary factor behind the current rally in the price of the yellow metal is the weakening of the dollar. The dollar has declined about six per cent against the rupee, year-to-date. “The dollar has been weakening because the US Federal Reserve is sounding increasingly dovish in its view on rate hikes,” says Chirag Mehta, senior fund manager-alternative investments, Quantum Asset Management Company.

The spike in geopolitical tensions vis-a-vis North Korea has also been positive for the yellow metal. “The sabrerattling by North Korea, the missile tests it has conducted, and the exchange of words between Donald Trump and the North Koreans has also led to people buying gold, in anticipation of further escalation in tensions,” says Mehta.

More, popular confidence in Trump's ability to push through his economic agenda, especially his tax cut proposals, is weakening. Finally, a surfeit of liquidity has driven the valuations of assets such as equities to high levels. Concerns around their stretched valuations also warrant an allocation to gold.

Where the yellow metal will go from its current level will depend again on the abovementioned